What occurs when aggregate supply remains stable but aggregate demand increases?

When aggregate supply remains stable but there is an increase in aggregate demand, the economy experiences an inflationary gap. This situation occurs because the demand for goods and services exceeds the economy's capacity to produce them at current price levels.

In this scenario, as consumers and businesses demand more goods and services, producers are unable to immediately raise their output due to fixed capacities in the short run. This increased demand leads to upward pressure on prices, resulting in inflation. The inflationary gap indicates that the economy is operating above its potential output, which can create inflationary pressures as resources become increasingly constrained.

Understanding this concept is crucial in macroeconomics, as it highlights the relationship between aggregate demand and supply and the implications for price levels and overall economic health. It illustrates how shifts in demand without corresponding changes in supply can lead to inflationary pressures, which policymakers must consider when formulating economic policy.